ARROWHEAD PHARMACEUTICALS, INC. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and we intend that such forward-looking statements be subject to the safe harbors created thereby. For this purpose, any statements contained in this Quarterly Report on Form 10-Q except for historical information may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “goal,” “endeavor,” “strive,” “intend,” “plan,” “project,” “could,” “estimate,” “target,” “forecast” or “continue” or the negative of these words or other variations thereof or comparable terminology are intended to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, trends in our business, or other characterizations of future events or circumstances are forward-looking statements. These forward-looking statements include, but are not limited to, statements about the initiation, timing, progress and results of our preclinical studies and clinical trials, our research and development programs, and our “20 in 25” pipeline goal; our expectations regarding the potential benefits of the partnership, licensing and/or collaboration arrangements and other strategic arrangements and transactions we have entered into or may enter into in the future; our beliefs and expectations regarding the amount and timing of future milestone, royalty or other payments that could be due to or from third parties under existing agreements; and our estimates regarding future revenues, research and development expenses, capital requirements and payments to third parties. The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately, and many of which are beyond our control. As such, our actual results and timing of certain events may differ materially from the results discussed, projected, anticipated or indicated in any forward-looking statements. Forward-looking statements are not guarantees of future performance and our actual results of operations, financial condition and cash flows may differ materially. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in “Item 1. Business” and “ Item 1A. Risk Factors” of Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part II of our most recent Annual Report on Form 10-K. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (the “SEC”). In light of the significant risks and uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking information. Statements made herein are as of the date of the filing of this Quarterly Report on Form 10-Q with the SEC and should not be relied upon as of any subsequent date. Except as may be required by law, we disclaim any intent to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. OVERVIEW The Company develops medicines that treat intractable diseases by silencing the genes that cause them. Using a broad portfolio of RNA chemistries and efficient modes of delivery, the Company’s therapies trigger the RNAi interference mechanism to induce rapid, deep and durable knockdown of target genes. RNAi is a mechanism present in living cells that inhibits the expression of a specific gene, thereby affecting the production of a specific protein. RNAi-based therapeutics may leverage this natural pathway of gene silencing to target and shut down specific disease-causing genes. The Company has focused its resources on therapeutics that exclusively utilize its high levels of pharmacologic activity in multiple animal models spanning several therapeutic areas. The Company believes that TRiM TM enabled therapeutics offer several potential advantages over prior generation and competing technologies, including: simplified manufacturing and reduced costs; multiple routes of administration including subcutaneous injection and inhaled administration; the ability to target multiple tissue types including liver, lung, CNS, muscle and adipose tissue; and the potential for improved safety and reduced risk of intracellular buildup, because there are fewer metabolites from smaller, simpler molecules. The Company’s clinical pipeline includes: • Hypertriglyceridemia - Plozasiran (formerly ARO-APOC3); • Dyslipidemia - Zodasiran (formerly ARO-ANG3); • Cardiovascular disease - olpasiran (formerly AMG 890 or ARO-LPA, out-licensed to Amgen) ; 20 • Muco-obstructive or inflammatory pulmonary conditions - ARO-MUC5AC and ARO-RAGE; • Idiopathic pulmonary fibrosis - ARO-MMP7; • Non-alcoholic steatohepatitis (NASH) - GSK-4532990 (formerly ARO-HSD, out-licensed to GSK); • Alpha-1 antitrypsin deficiency (AATD) - fazirsiran (formerly ARO-AAT, a collaboration with Takeda); • Chronic hepatitis B virus - JNJ-3989 (formerly ARO-HBV, out-licensed to GSK); • Complement mediated diseases - ARO-C3; • Non-alcoholic steatohepatitis (NASH) - ARO-PNPLA3 (formerly JNJ-75220795 or ARO-JNJ1); • Facioscapulohumeral muscular dystrophy - ARO-DUX4; • Dystrophia myotonica protein kinase (DMPK) - ARO-DM1; and • Hepatic expression of complement factor B (CFB) - ARO-CFB. The Company operates lab facilities in California and Wisconsin, where its research and development activities, including the development of RNAi therapeutics, take place. The Company’s principal executive offices are located in Pasadena, California. The Company continues to develop other clinical candidates for future clinical trials. Clinical candidates are tested internally and through GLP toxicology studies at outside laboratories. Drug materials for such studies and clinical trials are either manufactured internally or contracted to third-party manufacturers. The Company engages third-party contract research organizations (CROs) to manage clinical trials and works cooperatively with such organizations on all aspects of clinical trial management, including plan design, patient recruiting, and follow up. These outside costs, relating to the preparation for and administration of clinical trials, are referred to as “candidate costs.” As clinical candidates progress through clinical development, candidate costs will increase. The First Quarter of Fiscal 2024 Business Highlights Key recent developments during the first quarter of fiscal 2024 included the following: • Entered into an underwriting agreement with Jefferies LLC, BofA Securities, Inc., and Cowen and Company, LLC, as representatives of the several underwriters. The Company issued 15,790,000 shares of common stock at a price of $28.50 per share. The aggregate purchase price paid by investors was $450.0 million and the Company received net proceeds of $429.0 million after deducting advisory fees and offering expenses; • Filed an application for clearance to initiate a Phase 1/2a clinical trial of ARO-CFB, being developed as a potential treatment for complement mediated renal disease; • Filed an application for clearance to initiate a Phase 1/2a clinical trial of ARO-DM1, being developed as a potential treatment for type 1 myotonic dystrophy (DM1), the most common adult-onset muscular dystrophy; and • Entered into an Amended and Restated License Agreement with GSK, pursuant to which GSK received a worldwide, exclusive license to develop and commercialize JNJ-3989 (formerly ARO-HBV). JNJ-3989 had previously been licensed to Janssen Pharmaceuticals, Inc. See Note 2. Net loss was $132.9 million for the three months ended December 31, 2023 as compared to $41.3 million for the three months ended December 31, 2022. Net loss per share – diluted was $1.24 for the three months ended December 31, 2023 as compared to $0.39 for the three months ended December 31, 2022. The changes in net loss for the three months ended December 31, 2023 were due to the combination of a decrease in revenue and an increase in research and development expenses, which have continued to increase as the Company’s pipeline of candidates has expanded and progressed through clinical trial phases. The Company had $58.2 million of cash, cash equivalents and restricted cash, $162.1 million in available-for-sale securities, and $626.3 million of total assets as of December 31, 2023, as compared to $110.9 million of cash, cash equivalents and restricted cash, $292.7 million in available-for-sale securities and $765.6 million of total assets as of September 30, 2023. Based upon the Company’s current cash and investment resources, operating plan, and factoring in the $429.0 million in net proceeds from the January 2024 stock offering, the Company expects to have sufficient liquidity to fund operations for at least the next twelve months. Critical Accounting Estimates There have been no significant changes to the Company’s critical accounting estimates disclosed in the most recent Annual Report on Form 10-K for the fiscal year ended September 30, 2023. 21 RESULTS OF OPERATIONS The following data summarizes the Company’s results of operations for the following periods indicated: Three Months Ended December 31, 2023 2022 (in thousands, except per share amounts) Revenue $ 3,551 $ 62,546 Operating loss $ (136,545) $ (42,134) Net loss attributable to Arrowhead Pharmaceuticals, Inc. $ (132,864) $ (41,325) Net loss per share-diluted $ (1.24) $ (0.39) Revenue Total revenue for the three months ended December 31, 2023 decreased by $59.0 million, or 94.3% from the same period of 2022. The revenue for the three months ended December 31, 2023 were mainly driven by the revenue recognition associated with GSK and Takeda, as discussed below. The Company has evaluated each agreement in accordance with FASB Topic 808– Collaborative Arrangements and Topic 606- Revenue for Contracts from Customers . See Note 2 — Collaboration and License Agreements to Consolidated Financial Statements of Part I, “Item 1. Financial Statements” for more information on revenue recognized under the collaboration and license agreements. GSK : On December 11, 2023, GSK and the Company entered into the GSK HBV Agreement. Under the GSK-HBV Agreement, GSK received a worldwide, exclusive license to develop and commercialize JNJ-3989 (formerly ARO-HBV). JNJ-3989 had previously been licensed to Janssen in October 2018. Under the terms of the GSK-HBV Agreement, the Company received $2.7 million in December 2023, upon signing the GSK-HBV Agreement. Takeda : In October 2020, Takeda and the Company entered into the Takeda License Agreement. The Company has allocated the total $300.0 million initial transaction price to its one distinct performance obligation for the fazirsiran license and the associated Takeda R&D Services. Revenue is recognized using the input method (based on actual patient visits completed versus total estimated visits completed for the ongoing SEQUOIA and AROAAT2002 clinical studies). The Company previously expected these clinical trials to extend to September 2025 in order to demonstrate long term safety and efficacy in the open label extension (OLE) part of the studies; however, in August 2023, Takeda initiated a Phase 3 OLE study, concluding the Phase 2 study visits for patients in the SEQUOIA and AROAAT2002 studies by December 31, 2023. Consequently, the Company adjusted its revenue recognition estimates in the fiscal 2023 to align with the revised performance period and the remaining $0.9 million deferred revenue was recognized for the three months ended December 31, 2023. The Company recognized $16.3 million revenue for the three months ended December 31, 2022. Horizon/Amgen : During the three months ended December 31, 2022, Horizon recorded $6.7 million revenue of the total $40.0 million upfront payment received in July 2021, which was recognized on a straight-line basis over the timeframe for completing the Horizon R&D Services, concluding in the first quarter of 2023. Horizon also enrolled the first subject in December 2022 in a Phase 1 randomized, placebo-controlled trial to assess the safety, tolerability, pharmacokinetics and pharmacodynamics of HZN-457, triggering a $15.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023. Further, Amgen enrolled the first subject in its Phase 3 trial of olpasiran, which triggered a $25.0 million milestone payment to the Company which was paid in the second quarter of fiscal 2023. On October 6, 2023, Amgen,,Inc. completed its acquisition of Horizon and subsequently notified the Company of Amgen’s intent to terminate the HZN-457 license. Horizon exercised its right to terminate the Horizon License Agreement for convenience, which took effect on December 21, 2023. 22 Operating Expenses The analysis below details the operating expenses and discusses the expenditures of the Company within the major expense categories. For purposes of comparison, the amounts for the three months ended December 31, 2023 and 2022 are shown in the tables below. Research and Development (R&D) Expenses R&D expenses are related to the Company’s research and development discovery efforts and related candidate costs, which are comprised primarily of outsourced costs related to the manufacturing of clinical supplies, toxicity/efficacy studies and clinical trial expenses. Internal costs primarily relate to discovery operations at the Company’s research facilities in California and Wisconsin, including facility costs and laboratory-related expenses. The Company does not separately track R&D expenses by individual research and development projects, or by individual drug candidates. The Company operates in a cross-functional manner across projects and does not separately allocate facilities-related costs, candidate costs, discovery costs, compensation expenses, depreciation and amortization expenses, and other expenses related to research and development activities. The following table provides details of research and development expenses for the periods indicated: (in thousands) Three Months Ended December 31, 2023 % of Expense Category Three Months Ended December 31, 2022 % of Expense Category Increase (Decrease) $ % Candidate costs $ 45,274 39 % $ 42,284 51 % $ 2,990 7 % R&D discovery costs 29,222 25 % 12,693 15 % 16,529 130 % Salaries 22,595 19 % 14,689 17 % 7,906 54 % Facilities related 6,542 6 % 3,341 4 % 3,201 96 % Total research and development expense, excluding non-cash expense $ 103,633 89 % $ 73,007 87 % $ 30,626 42 % Stock compensation 9,007 8 % 8,402 10 % 605 7 % Depreciation and amortization 3,851 3 % 2,286 3 % 1,565 68 % Total research and development expense $ 116,491 100 % $ 83,695 100 % $ 32,796 39 % Candidate costs increased $3.0 million, or 7%, for the three months ended December 31, 2023 compared to the same period of 2022. This increase was primarily due to the additional progression of the Company’s pipeline of candidates into and through clinical trials, which resulted in higher manufacturing, outsourced clinical trial, and toxicity study costs. R&D discovery costs increased $16.5 million, or 130%, for the three months ended December 31, 2023 compared to the same period of 2022. This increase was primarily driven by the growth of the Company’s discovery efforts and continued advancement into novel therapeutic areas and tissue types, particularly due to an increase in labor along with rising costs associated with CNS studies and lab supplies. Salaries and stock compensation expense consist of salary, bonuses, payroll taxes, related benefits and stock compensation for the Company’s R&D personnel. The increases in salaries and stock comp expenses for the three months ended December 31, 2023 were primarily due to an increase in R&D headcount that has occurred as the Company has expanded its pipeline of candidates, in addition to annual salary increases. Stock compensation expense was based upon the valuation of stock options and restricted stock units granted to employees and directors. Facilities-related expense included lease costs for the Company’s research and development facilities in San Diego, California and Madison, Wisconsin. Facilities-related costs increased $3.2 million, or 96%, for the three months ended December 31, 2023 compared to the same period of 2022. This increase was mainly due to the additional lease expense in San Diego, California as the Company expands discovery efforts to identify new drug candidates. Depreciation and amortization expense, a non-cash expense, increased $1.6 million, or 68% for the three months ended December 31, 2023 compared to the same period of 2022. The increase was primarily attributed to higher leasehold improvements, due to completion of the development of the San Diego facility. Additionally, as of December 31, 2023, the Company completed the build out of one of its laboratory and office facilities in Verona, Wisconsin, and commenced depreciation. The Company anticipates these R&D expenses to continue to increase as its pipeline of candidates grows and progresses to later phase clinical trials, in addition to inflationary pressure on goods and services and the labor market. 23 General & Administrative Expenses The following table provides details of the Company’s general and administrative expenses for the periods indicated: (in thousands) Three Months Ended December 31, 2023 % of Expense Category Three Months Ended December 31, 2022 % of Expense Category Increase (Decrease) $ % Salaries $ 6,259 27 % $ 4,207 20 % $ 2,052 49 % Professional, outside services, and other 5,222 22 % 4,383 21 % 839 19 % Facilities related 1,025 4 % 1,005 5 % 20 2 % Total general & administrative expense, excluding non-cash expense $ 12,506 53 % $ 9,595 46 % $ 2,911 30 % Stock compensation 10,687 45 % 10,987 52 % (300) (3) % Depreciation and amortization 412 2 % 403 2 % 9 2 % Total general & administrative expense $ 23,605 100 % $ 20,985 100 % $ 2,620 12 % Salaries expense increased $2.1 million, or 49%, for the three months ended December 31, 2023 compared to the same period of 2022. The increase was driven by the combination of annual salary increases and increased headcount required to support the Company’s growth. Professional, outside services, and other expense includes legal, consulting, patent expenses, business insurance expenses, other outside services, travel, and communication and technology expenses. This expense increased $0.8 million, or 19%, for the three months ended December 31, 2023 compared to the same period of 2022. The increase was mainly due to legal services associated with new patent applications and intellectual property matters. Facilities related expense primarily includes rental costs and other facilities-related costs for the Company’s corporate headquarters in Pasadena, California. Stock compensation expense, a non-cash expense, was based upon the valuation of stock options and restricted stock units granted to employees. Depreciation and amortization expense, a noncash expense, was primarily related to amortization of leasehold improvements for the Company’s corporate headquarters. The Company anticipates these general and administrative expenses to continue to increase as its pipeline of candidates grows and progresses to later phase clinical trials, in addition to inflationary pressure on goods and services and the labor market. Other Income (Expense) Other income (expense) is primarily related to interest income and expense. Other expense increased $2.5 million for the three months ended December 31, 2023 compared to the same periods of 2022. The increase was primarily due to the non-cash interest expense on the liability related to the sale of future royalties. 24 LIQUIDITY AND CAPITAL RESOURCES The Company has historically financed its operations through the sale of its equity securities, revenue from its licensing and collaboration agreements, and the sale of certain future royalties. Research and development activities have required significant capital investment since the Company’s inception and are expected to continue to require significant cash expenditure as the Company’s pipeline continues to expand and matures into later stage clinical trials. Additionally, the Company expanded its facilities in Verona, Wisconsin and leased additional facilities in San Diego, California. Each of these expansions is designed to increase the Company’s internal manufacturing and discovery capabilities and requires significant capital investment. The Company’s cash, cash equivalents and restricted cash decreased to $58.2 million at December 31, 2023 compared to $110.9 million at September 30, 2023. Cash invested in available-for-sale debt securities was $162.1 million at December 31, 2023 compared to $292.7 million at September 30, 2023. On December 2, 2022, the Company entered into the Open Market Sale Agreement, pursuant to which the Company may, from time to time, sell up to $250.0 million in shares of the Company’s common stock through Jefferies LLC, acting as the sales agent and/or principal, in an at-the-market offering. As of December 31, 2023, no shares have been issued under the Open Market Sale Agreement. On January 2, 2024, the Company entered into an underwriting agreement with Jefferies LLC, BofA Securities, Inc., and Cowen and Company, LLC, as representatives of the several underwriters. The Company issued 15,790,000 shares of common stock at an offering price of $28.50 per share. The aggregate purchase price paid by investors was $450.0 million and the Company received net proceeds of $429.0 million after deducting advisory fees and offering expenses. The Company believes its current financial resources are sufficient to fund its operations through at least the next twelve months. The following table presents a summary of cash flows: Three Months Ended December 31, 2023 2022 (in thousands) Cash Flow from: Operating activities $ (117,840) $ (75,516) Investing activities 64,839 (80,694) Financing activities 267 250,576 Net (decrease) increase in cash, cash equivalents and restricted cash $ (52,734) $ 94,366 Cash, cash equivalents and restricted cash at end of period $ 58,215 $ 202,249 During the three months ended December 31, 2023, cash flow used by operating activities was $117.8 million, which was primarily due to the ongoing expenses related to the Company’s research and development programs and general and administrative expenses. Cash provided by investing activities was $64.8 million, which was primarily related to sales and maturities of investments of $133.5 million, offset by capital expenditures, $68.7 million of construction in progress. Cash provided by financing activities of $0.3 million was primarily related to cash received from stock option exercises. During the three months ended December 31, 2022, cash flows used by operating activities was $75.5 million, which was primarily due to the ongoing expenses related to the Company’s research and development programs and general and administrative expenses, partially offset by the receipt of $6.0 million from GSK and Horizon. Cash used in investing activities was $80.7 million, which was primarily related to capital expenditures, primarily construction in progress, of $38.9 million and investments of $111.2 million, partially offset by net sales and maturities of investments of $69.4 million. Cash provided by financing activities of $250.6 million was primarily related to the $250.0 million payment from Royalty Pharma as well as cash received from stock option exercises. See Note 11 — Liability Related to the Sale of Future Royalties of Notes to Consolidated Financial Statements of Part I, “Item 1. Financial Statements.” ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company ’ s exposure to market risk from that described in Item 7A of its Annual Report on Form 10-K for the year ended September 30, 2023. 25